Cost-cutting boosts RadioShack profit

CHICAGO (MarketWatch) -- RadioShack Corp. turned in a sharply higher first-quarter profit Monday after making deep cuts in spending and its workforce.

Fort Worth, Texas-based RadioShack, facing increasing competition in wireless retailing from bigger rivals Best Buy Co., Circuit City Stores Inc. and Wal-Mart Stores Inc, is in the midst of a sweeping turnaround.

The retailer, known mostly for its accessories, batteries and other gadgets for wireless products, said it earned $42.5 million, or 31 cents a share, compared with last year's profit of $8.4 million, or 6 cents a share.

Shares surged as much as 12% in early trading before easing up and finishing with a gain of just under 5% at $29.07.

At least one analyst warned that the stock might be getting ahead of itself.

"The stock is not cheap based on full potential earnings for the year," said Jefferies analyst Timothy Allen. The company did not update its full-year forecast of $1 a share to $1.20 a share.

"As estimates are revised and future earnings expectations are reassessed, we think that many of the momentum investors driving the stock may be more inclined to look for exit points than to add new positions," he said.

The results included a set of unusual items such as a $8.5 million pre-tax charge linked to severance charges that was more than offset by a $14 million pre-tax gain tied to a federal tax reversal. When it all shook out, RadioShack
RSH, -1.12%
said its earnings were helped by 2 cents a share in the quarter.

Total sales plunged 14.5% to $992 million from $1.16 billion a year ago after the company shuttered 506 company-operated stores and kiosks. The electronics retailer also continues to get hit by issues in its postpaid wireless business.

Analysts, on average, expected RadioShack to post a profit of 13 cents a share on revenue of $1.04 billion, according to Thomson Financial.

Same-store sales, the industry's benchmark of growth measured by receipts rung up at stores open longer than a year, tumbled 9.2%.

"We took the opportunity earlier this year to warn that same-store sales numbers for the first quarter were likely to be challenging, given the highly promotional nature of our business in the first quarter last year. And so it proved," said Chief Executive Julian Day in the earnings release. "Nonetheless, against this background we were able to produce financial results [that] reflected steady improvement in our operating economics."

Gross margins were considerably better as the company took steps to improve its inventory management and the merchandise mix overall. Much of its problems a year ago were because it wasn't stocking the types of high-margin products many consumers were looking for.

At the same time, RadioShack slashed its expenses by 16.9% to $412 million for the quarter as it let go of hundreds of employees and cut out costs for advertising and outside services.

That also helped boost free cash flow, which was significantly better at $37 million at the end of the quarter compared with the prior year's use of $310 million.

RadioShack began to shake up its finances and structure in February 2006, cutting jobs, closing stores and restocking shelves.

Last summer it hired Day, who was widely credited with the turnaround at Kmart stores and was at the helm during the retailer's buyout of Sears Roebuck & Co. to create Sears Holdings Corp.
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Since Day joined the retailer, shares have nearly doubled to Friday's close of $27.72.

Goldman Sachs analyst Matthew Fassler noted in an early research report that the top-line challenges appeared "mitigated" by a much leaner inventory position.

The results, he said, "reinforce our view that Day can raise profitability to surprising levels and that there is in fact a place in the U.S. consumer world for a convenience-based retailer of technology solutions," he said.

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